Last week, we laid out a simple trading setup for gold. That trade is already moving in our favor, and our preliminary target has already been hit.
The trade was based on the U.S. Dollar Index finally hitting significant resistance in the 107 area (black dotted line). That area was effective in capping U.S. dollar rallies last year, and did so again last week (red arrows).
U.S. Dollar Index via Tradingview
Since gold has recently been moving in the opposite direction of the dollar, we created a simple game plan for a quick long trade. We assumed that if the dollar hit resistance and began to fall, that gold would rally.
On Monday, gold rallied by nearly 2%, reaching our preliminary target of $2,595. As laid out in the game plan, we closed half our gold position at $2,595. With the remainder of the position, we raised our stop to our entry point of $2,565.
Now the trade looks like this:
Spot gold via Tradingview
The first target of $2,595 has been hit, reducing the trade by half. The stop (red) is now equal to the entry point (green) of $2,565.
If the stop is hit, we’ll experience our worst case scenario (WCS) — a profit of $30 on half the position, and breakeven on the other half (red).
I’ve added a second target at $2,680 (blue) for the remainder of the position. I chose $2,680 because that figure is slightly below the high point of a previous high (red line). If that target is reached, the result will be our best-case scenario (BCS) of +30 on half, and +115 on the other half.
Spot gold via Tradingview
Last month, we created a trading setup for silver. That setup involved two entries, at $33 and $32. Both of those entries have been hit, so we now have a full position in silver at an average entry price of $32.50 (green).
Our stop of $29.50 (red) was narrowly missed on November 14 (red arrow). In retrospect, I wish I’d entered this trade at a lower price, but what’s done is done.
I entered where my strategy indicated I should enter, on a pullback to the breakout point of an earlier cup and handle (shaded yellow). The price had other ideas, so I’m down approximately $1.50 per ounce on this trade. My three targets are highlighted in blue.
Spot silver via Tradingview
The only thing that remains for both of these positions is trade management.
The silver trade is what it is, there is nothing to do at the moment. I still think this trade could work. If I didn't, I'd close it right now.
If gold begins to rally toward my final target, I’ll raise the stop to an area above my entry point, to improve my worst-case scenario. Where I place that stop will depend on how far gold moves in my favor.
If gold moves against me, my stop will be triggered, and I'll walk away with a small profit of $30 per ounce on half the position.
At the time of publication, Ponsi was long spot gold and spot silver.